Wednesday, 28 April 2004

GLOBAL GUERRILLA FINANCING

Al Qaeda's shift from conventional terrorism to global guerrilla sabotage tactics will allow them to make money through the manipulation of financial markets. The sabotage of systems -- corporations, infrastructure, and networks -- can have a major impact on global stock and commodity markets. Access to these markets is easy and the returns are rapid (markets can make signficant moves in minutes and the returns extracted in about as much time). This is particularly worrisome if al Qaeda increases their use of mercenaries to expand their operations. Here are three attack types and the mechanisms by which to profit from them:

Focused attacks. These attacks target specific corporations. Likely targets: corporate headquarters, large plants, and senior management. For example, a release of low-grade (hospital level) radioactive material on the Microsoft campus would likely lop off a high percentage of Microsoft's market value. The best way to gain from this attack would be to buy put options (options that gain in price as the stock goes down) or make short sales on MSFT. Through easily set up "cut-out" accounts that trade on the largest markets, the financial return could easily be in the tens of millions.

Area attacks. An indirect method that uses financial mechanisms to gain from the damage to companies that have facilities or personnel in the "area" of a given attack -- within the blast area or downwind. The potential of multiple targets within the target area offers the potential of several parallel investment vehicles (a form of vicious diversification). The main benefit of "area attacks" is that it is possible to hide the true motive/target of the attack within a larger context.

Supply chain attacks. Another indirect method would be to benefit from damage to companies that are reliant on goods and services of the primary targets of the attacks. Supply chain attacks can also enable financial gain through the elimination of a key competitor (in a market with few, but highly interchangeable competitors) or through price accumulation in a critical resource. A good example is oil, where the elimination of any significant amount of production will drive up prices for this commodity. Financial gain would be accomplished through the purchase of futures contracts and call options.

Rapid Enforcement Mechanisms
The shift to this strategy will likely occur rapidly. Unfortunately, the mechanism needed to mitigate its impact will likely take a long time to arrive if we are merely reactive in our posture. The systems needed will take a long time to develop. A smart strategy would be to extend the current anti-terrorist financing task force (a mostly forensic joint Treasury/FBI/IRS operation) to include the following powers before this becomes a trend:

Short sales and put options. The are currently mechanisms that prevent trading on a stock. The power to implement this trading ban should be part of the task force's arsenal of tools. The delay will enable the task force the time needed to investigate accounts with suspect trades in place. In the case of area attacks, the task force should work with insurance data suppliers that track the influence an attack will have on buildings/facilities/companies in the area. This data will allow quick reaction to area attacks.

After hours trading systems. The popularity of Instinet and Island "matching networks" complicate the situation since they allow trades to occur after normal market hours. An attack that occurs in the middle of night could cause rapid price shifts in the after-hours market. The task will need to both establish ties with these networks to prevent trading in damaged companies and operate on a 24-hour basis. Rapidity is key here -- minutes and not hours.

Uncontrolled global markets. Some markets will be impossible to control. They are both too vast, too global, and too important to stop trading (oil for example). In this case, the emphasis should be on rapid forensic analysis of suspicious trades (particularly rapid turn-arounds). This analysis should be computerized for rapidity and generate a rapid interview process (in concert with global law enforcement) with suspected "investors."

NOTE: Although there have been reports of al Qaeda's use of this technique during 9/11, it is still likely an outlier activity. The vast majority of attacks have relatively little influence on markets.

Comments

GLOBAL GUERRILLA FINANCING

Al Qaeda's shift from conventional terrorism to global guerrilla sabotage tactics will allow them to make money through the manipulation of financial markets. The sabotage of systems -- corporations, infrastructure, and networks -- can have a major impact on global stock and commodity markets. Access to these markets is easy and the returns are rapid (markets can make signficant moves in minutes and the returns extracted in about as much time). This is particularly worrisome if al Qaeda increases their use of mercenaries to expand their operations. Here are three attack types and the mechanisms by which to profit from them:

Focused attacks. These attacks target specific corporations. Likely targets: corporate headquarters, large plants, and senior management. For example, a release of low-grade (hospital level) radioactive material on the Microsoft campus would likely lop off a high percentage of Microsoft's market value. The best way to gain from this attack would be to buy put options (options that gain in price as the stock goes down) or make short sales on MSFT. Through easily set up "cut-out" accounts that trade on the largest markets, the financial return could easily be in the tens of millions.

Area attacks. An indirect method that uses financial mechanisms to gain from the damage to companies that have facilities or personnel in the "area" of a given attack -- within the blast area or downwind. The potential of multiple targets within the target area offers the potential of several parallel investment vehicles (a form of vicious diversification). The main benefit of "area attacks" is that it is possible to hide the true motive/target of the attack within a larger context.

Supply chain attacks. Another indirect method would be to benefit from damage to companies that are reliant on goods and services of the primary targets of the attacks. Supply chain attacks can also enable financial gain through the elimination of a key competitor (in a market with few, but highly interchangeable competitors) or through price accumulation in a critical resource. A good example is oil, where the elimination of any significant amount of production will drive up prices for this commodity. Financial gain would be accomplished through the purchase of futures contracts and call options.

Rapid Enforcement Mechanisms
The shift to this strategy will likely occur rapidly. Unfortunately, the mechanism needed to mitigate its impact will likely take a long time to arrive if we are merely reactive in our posture. The systems needed will take a long time to develop. A smart strategy would be to extend the current anti-terrorist financing task force (a mostly forensic joint Treasury/FBI/IRS operation) to include the following powers before this becomes a trend:

Short sales and put options. The are currently mechanisms that prevent trading on a stock. The power to implement this trading ban should be part of the task force's arsenal of tools. The delay will enable the task force the time needed to investigate accounts with suspect trades in place. In the case of area attacks, the task force should work with insurance data suppliers that track the influence an attack will have on buildings/facilities/companies in the area. This data will allow quick reaction to area attacks.

After hours trading systems. The popularity of Instinet and Island "matching networks" complicate the situation since they allow trades to occur after normal market hours. An attack that occurs in the middle of night could cause rapid price shifts in the after-hours market. The task will need to both establish ties with these networks to prevent trading in damaged companies and operate on a 24-hour basis. Rapidity is key here -- minutes and not hours.

Uncontrolled global markets. Some markets will be impossible to control. They are both too vast, too global, and too important to stop trading (oil for example). In this case, the emphasis should be on rapid forensic analysis of suspicious trades (particularly rapid turn-arounds). This analysis should be computerized for rapidity and generate a rapid interview process (in concert with global law enforcement) with suspected "investors."

NOTE: Although there have been reports of al Qaeda's use of this technique during 9/11, it is still likely an outlier activity. The vast majority of attacks have relatively little influence on markets.

On Brave New War

G. Gordon Liddy Show (radio)...this is a seminal book in the truest sense of the term.. way ahead of the curve... go out and buy it right now -- G. Gordon Liddy

City JournalRobb has written an important book that every policymaker should read -- Glenn Reynolds (Instapundit)

Small Wars JournalWithout reservation Brave New War is for professional students of irregular warfare and for any citizen who wants to understand emerging trends and the dark potential of 4GW -- Frank Hoffman

Scripps Howard News ServiceA brilliant new book published by terrorism expert John Robb, titled "Brave New War," hit stores last month with virtually no fanfare. It deserves both significant attention and vigorous debate... - Thomas P.M. Barnett

Chet Richards DNIJohn has produced an important book that should help jar the United States and other legacy states out of their Cold War mindset. You can read it in a couple of hours – so you should read it twice...

Washington Times / UPIRobb correctly finds the antidote to 4GW not in Soviet-style state structures such as the Department of Homeland Security, but in decentralization -- William Lind (the father of 4th generation warfare).

Robert PatersonHaving painted a crystal clear picture of how a war of networks is playing out, he comes to an astonishing conclusion that I hope he fills out in his next book.

The Daily DishJohn Robb of Global Guerrillas has written the most important book of the year, Brave New War. - Daily Dish (The Atlantic)

Simulated LaughterWell-written. Brave New War reads more like an action novel than a ponderous policy book. - Adam Elkus

FutureJackedGo buy a copy of this book. Now. If you are low on cash, skip a few lunches and save up the cash. It is worth it. - Michael Flagg

ZenPunditThe second audience is composed of everyone else. Brave New War is simply going to blow them away. - Mark Safranski

Haft of the SpearThere aren’t a lot of books that make me recall a 12-year-old self aching for the next issue of The Invincible Iron Man to hit the shelves. Well done.
- Michael Tanji

Ed ConeHis book posits an Army of Davids -- with the traditional nation state in the role of Goliath. - Ed Cone (Ziff Davis)

Shloky.comThis is the first real text on next generation warfare designed for the general population and it sets the bar high for following acts. It is smart, it is a short read, and it will change your thinking. - Shlok Vaidya

Politics in the ZerosI suggest this is something Lefties need to start thinking about now, as that decentralized world is coming. - Bob Morris